_^>o 




P7^ 






LIBRARY OF CONGRESS 

ODQSfaflmflSfa 



Hollinger Corp. 
pH8.5 



Private Exchange and State 
Grain Inspection 



BY H. BRUCE PRICE 




MARKETING OF GRAIN 
LESSON 2 



Confidential Edition 
Issued for Members 



Copyright, 1922 

The American Institute of Agriculture 

CHICAGO I 






THE MAN WHO CONDUCTS THIS LESSON 




H. BRUCE PRICE 



It is said by some that H. Bruce Price knows 
more about the economics of grain grading than any 
other man. Whether or not the accuracy of this 
opinion is questioned, there is no doubt but that 
very few men have made the consistent and thorough 
study of grain grading that has been made by Mr. 
Price. 

Perhaps the most important part of his work is 
represented by an extended and thorough investiga* 
t ion made on the Minneapolis market. This investi- 
gation was to determine the actual effect upon the 
sale of grain made by inspection and the use of 
standard grades. Mr. Price spent many months in 
actual contact with the handling and selling of 
grain on the Minneapolis Board of Trade. Included 
in this first-hand knowledge is a great deal of 
information as to the effect of grading on prices. 

But Prof. Price is familiar with grain grading, 
not only from the standpoint of those who handle 
grain on the terminal markets, but also from the 
standpoint of the local elevator operator and the 
farmer. 

He was born on a farm in North Dakota, and his 
whole life has been spent in contact with some phase 
of the grain trade. During his early training and 



GRAIN LESSON 2 



work he was in contact with the terminal markets of 
the West. Later, he went to Yale University as 
instructor. While in Connecticut, he spent his 
time outside of his school duties in studying the 
markets of New Haven. 

In the course of this study, he helped, very 
materially, in developing a market reporting 
service for the state of Connecticut. His work 
there was more from the standpoint of the consumer 
than from the standpoint of the market man. 

So you see, he has a well-rounded experience 
which enables him to look at grain inspection from 
the standpoint of the producer, the market man, 
and the consumer. 

Prof. Price is, at present, assistant pro- 
fessor of Agricultural Economics in the University 
of Minnesota. He came there from Yale, where he 
was instructor in Political Economy; previous to 
his work at Yale, he was instructor in Agricultural 
Economics at the Connecticut Agricultural College 
at Stores, Conn. 

SUMMARY OF PROF. PRICE'S TRAINING AND EXPERIENCE 

EXPERIENCE: Assistant Professor of Agricultural Economics, University of 
Minnesota, 1921- 

Instructor in Political Economy, Yale University, 1919-21 

Instructor in Agricultural Economics, Connecticut, Agricultural College, 
1917-19 

MEMBER: American Economic Association 

AUTHOR: ''Cooperative Buying by Farmers' Clubs, in Minnesota, ' ' 1916 
''Marketing Butter and Eggs in New Haven,'' 1917 
''Inspection and Grading of Grain'' (Publication being arranged) 

STUDENT: Dakota Wesleyan University, 1910-13 
A. B. University of Wisconsin, 1914 
M. A. University of Minnesota, 1916 
Ph. D. Yale University, 1921 

HOW TO STUDY THIS LESSON 

This is a lesson you may find difficult. If 
you do not appreciate its importance after reading 
part of it, it may occur to you that a person in your 
particular situation would have little use for this 
knowledge. 

No one having anything to do with the marketing 
of grain can be proficient in his work without this 
knowledge because the inspection of grain is the 
basis on which grain is sold on the terminal market, 
and without a doubt, traders are going to depend 
on grades in the future more than in the past. 



EXCHANGE AND STATE INSPECTION 



Learn the Advantages of Inspection 

Familiarise yourself thoroughly, therefore, 
with Part I. Spend at least one whole study period 
on this alone . Make sure that you not only remember 
but that you understand every one of the eight 
reasons why grain inspection is of advantage to the 
grain trade. That is the most important thing in 
Part I. 

You should know in a general way, however, the 
history and development of grain inspection. That 
will help you to understand why certain features 
now exist in our grain inspection system. 

Spend Two Study Periods on Fart II 

You ought to spend at least two study periods 
on Part II; not so much because of its importance, 
but because it is difficult to master these facts 
in a short time. 

Test Yourself Before Answering Questions 

After spending at least three study periods on 
the lesson, read the entire lesson through without 
a stop, then refer to the study outline and test 
yourself by giving briefly a summary of the various 
sections of the lesson either orally or in writing. 

It always pays to write a review of the lesson. 
After you have written it without the help of the 
text of the lesson, the facts are sure to be more 
firmly fixed in your mind. After this suggestion 
has been followed, open your question envelope and 
proceed to answer the questions contained there. 

Discuss This Subject With Your Local Buyer 

By all means discuss the subject of inspection 
with your local grain buyer. Ask him if the grain 
he ships is inspected, and whether the inspection 
is satisfactory or not. 

Ask his opinion as to the advantages of ex- 
change inspection over state inspection. He may 
prefer one or the other, but discussing the matter 
with him will bring out some points that will fix 
the importance of these subjects in your mind more 
than will be done by any other process. 

Ask him what advantages he believes he gains 
by having his grain officially inspected. 

Ask him if he thinks grain marketing would be 
satisfactory without any inspection service at all. 



GRAIN LESSON 2 



STUDY OUTLINE 

PART I 

Page 

Advantages of Grain Inspection 5 

1. The Better Utilization of Storage Capacity 5 

2. The Easier Financing of Crops 6 

3. The Dissemination of More Accurate Market 

Information 6 

4. The Encouragement of Future Trading 7 

5. More Effective Regulation of Market 

Practice . 7 

6. The Reduction of Marketing Costs 8 

7. The Stimulation of Trade 8 

8. How Inspection Increases Prices 9 

Early Devel o pment of Grain Inspection 10 

New Lands Opened to Large Scale Production... 11 

How Inventions Stimulated Greater Production. 12 

Why the West Specialized in Grain 14 

The First Important Primary Grain Markets.... 14 

Why Chicago Became the Largest Primary Market 15 
First Grain Inspection System Organized at 

Chicago in 1856 15 

Difficulties wit h Inspection Services 16 
The Change from Private to Government 

Inspection 17 

Why Private Inspection Is Not Enough 17 

Why Inspection by Exchanges Was Unsatisfactory 18 

PART II 

State Inspecti o n and How It Operates 19 

Organization of State Inspection..... 20 

How Appeals on Grading May Be Made 21 

Why Fair Samples Are Assured 24 

Indoor Inspection a Recent Development 25 

What to Do if Dissatisfied with the Inspection 25 

The Drawbacks to Universal State In s pection 27 
Inspection Cost Paid by Shippers and Elevator 

Operators 31 

Double Inspection Increases Marketing Costs. 33 

Attempts to Correct Faults of State Inspection 33 

Inspection at Country Markets 37 

Payment for Dockage Is Compulsory 38 

Law Aims to Maintain Healthy Competition.... 40 



PRIVATE EXCHANGE AND STATE GRAIN 
INSPECTION 

BY H. BRUCE PRICE 

You have learned in the previous lesson that 
efficient inspection requires the impartial and 
accurate application of standards whose tests are 
used by those who manufacture or use the product. 
This is just as true of grain as of any other class 
of products. 

Grades provide a common trade language used in 
buying and selling. 

Impartial and accurate inspection is there- 
fore necessary to secure the confidence of buyers 
and sellers and to keep the grain marketing ma- 
chinery moving smoothly. Useful tests for grading 
must be adopted if the grades have any significance 
or value to the buyers. 

PART I 

ADVANTAGES OF GRAIN INSPECTION 

The advantages of inspection to the grain trade 
are: 

1. The Better Utilization of Storage Capacity 

Without an inspection system, the operators of 
public warehouses would be obliged to store the 
grain of different owners in separate bins. A loss 
of much costly storage capacity would thereby be 
incurred. 

With an inspection system, on the other hand, 
the public warehouses may issue warehouse receipts 
for stored grain, and the owner is assured that he 
will later get an amount of grain of the grade or 



6 GRAIN LESSON 2 

quality that he stored. The lots of grain of the 
same grade that belong to different owners may, 
therefore, be placed in the same bin and the storage 
capacity may be utilized more fully. 

2. The Easier Financing of Crops 

Those who wish to borrow on stored grain or 
grain in transit, find that banks, under normal 
conditions, will accept a warehouse receipt or a 
bill of lading acompanied by a certificate of grade 
as security for a loan. A bank will not only loan 
more freely, but will commonly loan a larger pro- 
portion of the market value when the commodity's 
quality and value are so evidenced. 

This is a valuable asset to grain producers, 
and it undoubtedly accounts in part for the better 
financing accommodations that grain merchants have 
enjoyed over those who market less highly stand- 
ardized produce. 

3. The Dissemination of More Accurate Market 
Information 

The quotations of a market reporting service 
become more significant as the grades become more 
precise. For fruits and vegetables, for example, 
the lack of definite grades is a serious handicap 
to the development of a market reporting service, 
since those grades that are established frequently 
vary between different markets, and they do not 
always represent the same quality in the same 
market from day to day. 

A quotation for A Grade Apples, or for No. 1 
U. S. Standard Potatoes, is helpful market informa- 
tion, but it is less reliable than the quotation 
for No. 2 Dark Northern Wheat or No. 3 Yellow Corn, 
because the standards have less precision in state- 
ment and in application. 

This service of an inspection system is par- 
ticularly important in a broad market. It enables 
the shippers and buyers who reside at a distance 



EXCHANGE AND STATE INSPECTION 7 

from the market to keep in close touch with, and 
to take advantage of market conditions. This tends 
to allay the suspicions of shippers and buyers and 
to prevent the friction that arises therefrom. 

4. The Encour a gement of Future Trading 

The setting up of an impartial authority to 
grade grain by certain tests that have been agreed 
upon, enables a merchant to agree in the present to 
accept goods in the future, for he is certain of re- 
ceiving goods of the quality agreed upon. 

Contracts for future delivery may be made in 
the absence of an inspection system when the buyer 
is relatively certain of the quality of product 
that will be tendered, but it is inconceivable that 
future and contract trading should have developed 
to its present importance without an inspection 
system. It is not within the scope of this lecture 
to discuss the economies of future trading - that 
is left to a later lesson. Suffice it to say, that 
without inspection, the stabilizing and risk- 
taking services of future-trading would be seri- 
ously impaired. 

5. More Effective Regulation of Market Practice 

In the absence of an inspection system, and, 
to a lesser degree when the grade descriptions are 
not specific or are not rigidly enforced, question- 
able marketing methods may be practiced. 

Foreign materials of little value are some- 
times mixed with grain of superior quality and the 
mixture sold as being that of the best grain. Or, 
grain that is represented by warehouse receipts may 
be adulterated with mixtures of inferior quality. 
In order to standardize marketing practice and to 
protect the holders of warehouse receipts, exchange 
and state inspection has invariably provided for 
the supervision of the mixing, the grading, and the 
delivery of grain that is secured by warehouse 
receipts. 



8 GRAIN LESSON 3 

Cotton inspection has served a similar purpose 
in the cotton trade, and the same end is secured 
by federal cotton inspection provided by the Cotton 
Futures Act of 1914. 

6. The Reduction of Marketing Costs 

The greater economy in the use of storage and 
credit facilities, the intensification of competi- 
tion through a market reporting system that extends 
the radius of the market, the working of the market 
with less friction and misunderstanding due to the 
use of a common trade language, and the reduction 
of risks by hedging in the "futures" market - all 
these help to stabilize the market and thereby 
reduce the costs of the various necessary marketing 
services. 

7. The Stimulation of Trade 

Anything that breaks down the barrier of trade 
suspicion increases the supply of produce and the 
demand for it. Inspection and standardization of 
products do this. 

In the export trade, foreign grain buyers 
favor those markets, other things being equal, that 
have the most reliable inspection. Markets that 
have manipulated their grain grading to supposedly 
help the market or to assist a group of dealers who 
get into a difficult situation in filling their 
grain contracts, have usually found the demand for 
their grain switching to other markets and their 
foreign markets closing to them. 

In cases where inspection has been abused 
persistently and flagrantly, foreign buyers have 
been known to use concerted action in refusing to 
buy further until the abuse was rectified. On the 
other hand, those countries and markets that have 
maintained uniform grading have enjoyed a con- 
tinuously good foreign demand. 



EXCHANGE AND STATE INSPECTION 



Inspection Aids American Exporting - An ad- 
ditional advantage of inspection is the greater 
control which the shipper exercises over his grain 
exports, an advantage to the exporting country 
in that its exporters have greater bargaining power 
in making final settlement. The grain of the 
United States and Canada, the only two grain ex- 
porting countries that have grain inspection, is 
exported on "American or Dominion inspection cer- 
tificate final." 

That is, the foreign buyer agrees to accept the 
American or Dominion inspection certificate, and 
the quality of the grain is not subject to arbitra- 
tion at the European port of destination. 

Grain exports from other countries, on the 
other hand, are sold on a "Fair Average Quality" of 
the season's shipments, and the quality is subject 
to arbitration at the port of destination. Al- 
though the arbitration committees of the European 
grain trade associations may try to act fairly in 
arbitrations involving quality, the American and 
Canadian exporters have the advantage over ex- 
porters in other countries. The responsibility of 
deterioration during the time of transportation 
does not rest on them. They are more certain of 
the price to be received. And they are less subject 
to loss from rejected shipments when market con- 
ditions develop unfavorably to the buyers between 
date of purchase and time of final settlement. 

The advantages of inspection to the domestic 
trade are less apparent. Yet, it stands to reason 
that buyers and sellers favor those markets that 
have inspection rather than those that do not, and 
that the preference for a market is in direct re- 
lation to the reliability of its inspection. 

8. How Inspection Increases Prices 

As the risks of uncertain grading decrease, the 
cost of marketing grain is reduced and the dealer 
can pay the producer a better price or sell to the 



10 GRAIN LESSON 2 

consumer at a lower figure, or both, in the long run. 
Production and consumption are thereby stimulated, 
and trade and industry prosper, an advantage which 
agricultural producers and consumers share mutually. 

EARLY DEVELOPMENT OF GRAIN INSPECTION 

Grain inspection developed earlier than the 
inspection of other farm products. Its more uni- 
versal demand as a food, its greater durability, 
and its greater uniformity of quality from season to 
season, doubtless account in a large measure for 
this. Of the grains, wheat inspection, due to its 
wider demand as a food, its greater intrinsic value, 
and its less perishable character, developed first. 
Corn, oats, rye, and other grain inspections were 
established as transportation developed and as a 
large surplus of them was produced to be marketed 
through central wholesale markets. 

Inspection Not Needed in Coloni a l Times 

The development of grain inspection dates from 
the middle of the nineteenth century. During the 
colonial and the early national period, the grain 
trade of the United States was chiefly local. The 
flour milling industry was not centralized. Flour 
was made in thousands of small country mills. Some 
grain was exported, but the total was never large. 
Most of the grain was exported as flour or meal. 

The United States census of 1860 states that 
from 1830 to 1845, 90% of the wheat exports were in 
the form of flour, while a somewhat smaller, al- 
though large proportion of the corn was exported as 
meal. The same authority shows that from 1790 to 
1817, the wheat exports did not exceed one and one- 
half million bushels during a single year, and that 
the exports of corn never reached three million 
bushels. In no year did the total grain exports 
reach five million bushels. 

As compared with the volume of grain in the 
domestic and foreign trade at the present time, 



EXCHANGE AND STATE INSPECTION 11 

these figures are very small. In fact the largest 
markets of that early period handled a volume of 
grain that did not exceed the volume of many of the 
prosperous country markets of today. 

Under those conditions, the possibilities for 
developing an inspection and grading system were 
obviously limited. The volume of grain did not 
warrant the expense. And the hand methods of hand- 
ling grain in bags did not permit quick and cheap 
examination. 

How Government Land Policies Were Changed 

During the second quarter of the nineteenth 
century, the grain market gradually lost its 
colonial characteristics. Important among the 
factors causing the transformation was the gradual 
change from the original policy of selling public 
lands to swell the public revenues to a policy of 
disposing of the land to encourage settlement. 

Originally the public lands were sold at auction 
in tracts of not less than 640 acres. Beginning in 
1801, however, the terms of sale were made more 
attractive to the settler with a small amount of 
capital. A credit policy was first introduced. 
Then the minimum size of tracts sold was reduced 
from 640 acres to 160 acres, to 80 acres, and finally 
to 40 acres. The sale price was likewise reduced 
from $2 to $1.25 per acre. 

The first important milestone in this change 
of policy was the Preemption Act of 1841, which 
withdrew the public lands from sale to the public 
and reserved them for actual settlers at $1.25 per 
acre, while the last important land mark was the 
Homestead Act of 1862, which enabled the actual 
settlers and cultivators of land to obtain title to 
160 acres of public lands without charge. 

New Lands Opened t o La rge Sca le Production 

Bear in mind now that the public lands that 
were open to settlement during the period lay 
roughly between the Alleghany Mountains on the East 



12 GRAIN LESSON 2 

and the Mississippi River on the West, embracing 
that important grain producing region now occupied 
by Ohio, Kentucky, Indiana, Illinois, Michigan, 
and Missouri. 

Remember also, the prairie character of this 
region with its broad, rolling, and fertile lands 
admirably suited to the large scale production of 
grain and contrast it with the mountainous, stony, 
and frequently barren lands of the Middle Atlantic 
and New England districts where small, irregularly 
shaped fields are the rule. Before the tremendous 
latent agricultural production in these new lands 
could be realized, however, new methods of produc- 
tion, better transportation, and new markets had to 
be found. 

How Inventions Stimulated Greater Production 

The inventors of America rose to the opportuni- 
ties and the demands of the times by inventing farm 
machines that transformed production methods 
through eliminating hand work. 

John Deere made his first steel plow from an old 
saw blade in 1837. The first successful reapers 
were patented by Obed Hussey in 1833 and by Cyrus 
McCormick in 1834. About this time, the grain 
thresher and separator was substituted for the 
flail, and the corn cultivator superseded the hoe, 
while a general improvement in wagons, harrows, and 
other farm implements took place. 

To one accustomed to present methods of grain 
production in the grain belt, the mammoth saving in 
labor brought about by these new machines is hard 
to comprehend. Studies of the labor cost of pro- 
duction in 1830 and in 1900 show, however, that an 
economy in labor was realized by the substitution of 
horse power in the following big perecentages : 
95.7% for barley, 60.9% for corn, 89.2% for oats, 
and 94.5% for wheat. 



EXCHANGE AND STATE INSPECTION 15 

Lack of Transportation Hampered Development 

After 1790, people moved rapidly westward over 
the Alleghany Mountains and spread out over the 
western prairies, furnishing the labor to develop 
the agricultural resources. But the lack of cheap 
transportation facilities retarded tne progress 
some. 

Waterways were then the only highways for agri- 
cultural commerce. Railways were unknown, and 
transportation by wagon and team was too expensive 
to permit an extensive trade. 

The extension of slavery in the South and 
Southwest after 1815 created a demand for the food 
products of the North. A thriving trade sprang up 
on the Ohio and Mississippi rivers. The North ex- 
changed meats, hay, flour, and grain for sugar and 
manufactured goods that had been shipped from New 
England by way of the South. Due to the comparative 
high cost of river transportation, however, much 
of the grain was shipped as flour or meal. 

The Erie Canal Started Commerce East 

It was not until after the completion of the 
Erie Canal, from Troy on the Hudson River to Buffalo 
on Lake Erie, in 1825, that there was any appre- 
ciable growth in the traffic in grain. And even 
this linking of the Atlantic with the great inland 
waterway of the Great Lakes did not stimulate the 
commerce in grain as much as you might expect. Its 
great impetus awaited- latter events. 

The Irish potato famine of 1846-47 created a 
new demand for American breadstuff s which was 
satisfied by the West which had now become the prin- 
cipal surplus wheat and corn producing section of 
the country. 

The most direct route as well as the most satis- 
factory from the standpoint of climatic conditions 
was through the Erie Canal. The shipments of grain 
over this waterway increased three fold in 1846 
and four fold in 1847. While this stimulus was 



14 GRAIN LESSON 2 

only temporary, the removal of the English tariffs 
on grain imports in 1846 and the growing manufac- 
tures of the East created a demand for the import of 
breadstuff s that caused a continuous growth of tho 
eastward commerce in grain. 

Why fthe West Specialized in Grain 

As a result of these changes in agriculture, 
the center of surplus grain production had moved 
from the Atlantic Coast to the Ohio Valley by 1840. 
The East, being unable to compete successfully in 
grain production, directed its energies toward 
manufacture and commerce and became increasingly 
dependent upon the West for its food supplies. 

The wheat production of New England was less 
than one bushel per capita in 1840. For the Middle 
Atlantic states of New York, Pennsylvania, and New 
Jersey, it was six bushels per capita. While for 
the East Central states including Ohio, Michigan, 
Indiana, Illinois, Wisconsin, and Kentucky, it was 
nine. 

The production per capita of the first two 
sections has gradually decreased since that date, 
while that of the East North Central has gradually 
increased, having reached its maximum per capita 
production of 18.7 bushels in 1880. As the popula- 
tion continued to move westward, the Upper Missis- 
sippi Valley and the Missouri Valley became import- 
ant regions of surplus grain production. 

The First Important Primary Grain Markets 

Marketing becomes important only when there is 
a surplus of goods to be exchanged. Since it was 
in the Ohio Valley and the Upper Mississippi Valley 
that the first large surplus grain producing area 
developed, it is in this section of the country 
that we would expect the large markets with import- 
ant marketing problems to appear first. 

Cincinnati, on the Ohio River in Southern Ohio, 
and St. Louis, on the Mississippi River in South- 
eastern Missouri, were both on the trade route 



EXCHANGE AND STATE INSPECTION 15 

between the North and South. And, being in the 
region of heavy grain production, they became the 
first important primary grain markets in the West, 
(A primary market is a market which receives large 
quantities of produce direct from country markets.) 

As the currents of trade moved eastward, the 
lake ports assumed greater importance. The river 
markets continued to grow, but, relative to the mar- 
kets on the northern route , their significance 
became less and less. 

Why Chicago Became the Largest Primary Market 

Chicago and Milwaukee at the head of Lake 
Michigan became the important markets on the north- 
ern trade route. The excellent water and rail 
transportation facilities at the head of Lake 
Michigan that tapped the grain region of northern 
Illinois, Iowa, and southern Wisconsin, gave 
Chicago an early lead over competing markets in 
volume of grain handled, which it has maintained to 
the present day. 

The first shipment of grain of 38 bushels was 
made from Chicago in 1838. In 1850, receipts were 
slightly over one million bushels ; while in 1855, 
they were nineteen and one-quarter million bushels. 
In 1860, 34 million bushels were shipped. No such 
phenomenal growth had been experienced by any other 
grain market. 

First Grain Inspection System Organized at 
Chicago in 1856 

In 1860, Chicago's receipts were three times 
those of its chief competitor, St. Louis. It is, 
therefore, not surprising that Chicago introduced 
modern grain inspection to the United States and 
to the world. 

Previous to the incorporation of the Chicago 
Board of Trade in 1849, all grain transactions were 
made on the basis of samples shown, or of grain 
offered directly from farmers' wagons. The rapid 



16 GRAIN LESSON 2 

extension of the market area, and the phenomenal 
growth of the volume of grain in the 50' s, soon 
demonstrated the inefficiency of sample trading in 
a market where millions of bushels of grain were 
being merchandised, stored, and financed. 

The Board of Trade, accordingly, exercised its 
charter privileges to grade grain by promulgating 
grain standards for wheat and appointing grain in- 
spectors in 1856. 

DIFFICULTIES WITH INSPECTION SERVICES 

This first inspection system did not work as 
smoothly as had been hoped. There was no chief 
inspector, and consequently no uniformity in 
grades. Some inspectors were apparently lax, if 
not dishonest, in their inspections. And some 
warehousemen did not give the system their support. 

The result was, according to a pioneer member 
of the Board of Trade, that Chicago spring wheat 
in the New York market was five to eight cents per 
bushel below the price of Milwaukee wheat. 

The Board of Trade could not permit this situa- 
tion to continue. Accordingly, in 1858, it re- 
organized its inspection department. A chief 
inspector was put in charge and was made respon- 
sible to the Board of Trade for the grain grades and 
the settling of disputes over the grades. The 
grades were revised, weight per bushel being the 
chief test, and the warehousemen signed an agree- 
ment with the Board of Trade to observe the rules of 
the new system. In short, there was laid in this 
reorganization, the foundation of the present 
American inspection system. 

Why Some Mistrusted Inspection Authorities 

From the beginning, grain inspection has 
struggled with two sets of problems ; the one con- 
cerns the grade requirements and the policy of 
inspection; the other concerns the organization and 



EXCHANGE AND STATE INSPECTION 17 

control of this marketing function. The latter has 
commanded the most attention. 

During the formative period of the grain mar- 
kets, the standards of business methods of grain 
dealers were not highly developed. The rules of 
conduct for their members were being formulated by 
the grain exchanges. The occasional failure of the 
exchanges to prevent the questionable trade practice 
of a member, and the existence of keen competition 
between the buyers and sellers for the control of 
the exchange functions, created much suspicion and 
mistrust. 

Accordingly, down to the enactment of the Grain 
Standards Act of 1916, which created the federal 
supervision of grain inspection, the question has 
been, "Who should control inspection and how should 
it be organised to insure that control?" 

The Change From Private to Government Inspection 

Grain inspection has passed through four stages 
of control. The first stage is private inspection; 
the second, exchange inspection; the third, state 
inspection; and fourth, federal supervision. 

Inspection given by an individual or an asso- 
ciation probably is more important in the history 
of most of our grain markets because it represents 
the beginning of grain inspection in many markets. 

At Minneapolis, the first ispection appears to 
have been given by the Millers' Association. For a 
number of years, Philadelphia and Boston grain ex- 
changes arranged with a private inspector to grade 
the grain arriving at those markets, the inspector 
agreeing to use the grain standards established by 
the grain exchange in return for the fees which he 
himself collected. 

Why Private Inspection is not Enou gh 

The very limited control which grain dealers 
as a class, exercise over private inspection, and 
the opportunity which it affords the inspector to 



18 GRAIN LESSON 2 

grade grain to his own financial advantage, caused 
most grain exchanges to create an inspection de- 
partment as soon as they were organized. This 
superseded the private inspection in most markets. 

Private inspection has, therefore, been an 
unimportant factor in the large grain markets. In 
fact, the states in creating state inspection, 
frequently prohibit it by law. The prestige which 
federal supervision affords to private inspectors 
has caused private inspection to spring up in some 
of the smaller markets which previously had no 
inspection. While this is a valuable service to 
the grain trade, from the standpoint of the pro- 
portion of the trade served, it will probably con- 
tinue to play an insignificant role. 

Why Inspection by Exchanges was Unsatisfactory 

In many grain markets, including Chicago, in- 
spection was introduced by the grain exchange. A 
grain exchange is a private corporation whose mem- 
bers are interested in the grain trade or an allied 
industry. 

The representation of all the terminal market 
grain interests in it, makes it the logical organ- 
ization to introduce inspection or to succeed 
private inspection, since the balancing of the in- 
terests of one group against the interests of other 
groups, tends to insure impartial administration of 
grading. Moreover, being controlled by themselves, 
grain merchants naturally have more confidence 
in it. 

One important grain interest, the producer, is 
not represented in exchange inspection. However, 
it is often maintained that the commission mer- 
chant gives the producer and shipper representa- 
tion. Doubtless the interests of many commission 
dealers are identical with those of their shippers. 
But there is no certainty that the interests of all 
grain merchants are identical with their shippers 
Moreover, commission man representation is not 



EXCHANGE AND STATE INSPECTION 19 

equal to the direct representation enjoyed by mem- 
bers of the exchange. 

When to these facts are added the effect of the 
publicity given occasional warehouse and inspec- 
tion abuses, you can understand the cause for dis- 
satisfaction with exchange inspections which 
producers and country shippers sometimes have. 

Undoubtedly, most of the trade abuses that 
existed when exchange inspection was the prevailing 
type are now prevented. Unquestionably, the coun- 
try shippers in the beginning were often ignorant 
of grades. Thus, it was easy for them to believe 
that their grain was misgraded at the terminal 
market. The fact remains that the exchange organ- 
ization was not sufficiently comprehensive to give 
all trade interests representation. So long as it 
could not do this, it failed because it could not 
command the confidence of producers and country 
shippers. 

PART II 

STATE INSPECTION AND HOW IT OPERATES 

State inspection was the next logical stage. 
In the last half of the last century, when most of 
the state inspections were created, grain inspec- 
tion was considered a local rather than a national 
problem. It was difficult to arrange effective 
producer representation on the grain exchanges even 
though the exchanges were willing. Hence the state 
organization offered the best solution, because it 
represented all groups within its boundaries. 

Exchange inspection was superseded in a few 
years by state inspection in all of the important 
primary markets of the principal grain producing 
states, 

Illinois took the lead in 1871 in adopting state 
inspection (which by the way is limited to Chicago 
and East St. Louis at the present time). Minnesota 
followed its example in 1885; Missouri in 1889; 



20 



GRAIN LESSON 2 



Wisconsin in 1895 (limited to Douglas County in 
which Superior is located) ; Kansas in 1897 ; Wash- 
ington in 1911 ; Montana in 1913 ; North Dakota in 
1917; Oregon in 1917; and California in 1921. 

Organization of State Inspection 

State inspection differs from exchange inspec- 
tion chiefly in its source of authority, state in- 
spection deriving its powers from the law, exchange 



PRINCIPAL GRAIN EXCHANGES 




CSKS 5t4t« Inspection 
O Principal t»chfl»g«a having &ttt« tnaptct ion 
■Principal Zxc**r\fta havlnf Uchdng* Inspect 



FIGURE 1. AVAILABLE STATE AND EXCHANGE INSPECTION 

The shaded areas show those states having state inspection in 1920. 
you will see that not all of the important grain growing states have 

state inspection 



inspection exercising a power granted in the 
charter of the exchange. Their organisations are 
similar. Each has an inspection department and an 
appeals department. In Minnesota, the state in- 
spection department is a division within the Rail- 
road and Warehouse Commission. The commission 
appoints a chief inspector who is responsible for 
the grades of the inspection department and ap- 
proves the appointment of deputy chief inspectors, 
inspectors, samplers, and helpers appointed by the 
chief inspector. 



EXCHANGE AND STATE INSPECTION 21 

The chief inspector is appointed for two years 
and gives a bond of $10,000 as a guarantee of faith- 
ful and impartial performance of service. His 
office is in St. Paul. Since Minneapolis and 
Duluth are each important grain markets, an inspec- 
tion office and laboratory is maintained in each 
city, a deputy chief inspector being in charge of 
each office. 

A merit system has been used since 1900 in 
making appointments. It works similarly to ap- 
pointments by civil service except that there is 
less formality in hiring and discharging employees. 
At the same time, it encourages efficiency, since 
promotion is secured by faithful service and since 
greater proficiency in grading is obtained by the 
long tenure of office that is thereby encouraged. 
Most of the inspectors, including the chief inspec- 
tor, have worked with the inspection department for 
many years. 

Boards of Grain Appeals Establish Minneso ta 
Grain Standards 

There are two Boards of Grain Appeals: one is 
located in Duluth ; the other in Minneapolis. Each 
Board has three members who are appointed by the 
governor for a term of three years. One member 
of each Board retires each year. 

The functions of the Board are two-fold. In 
the first place, they establish the grade standards 
for Minnesota. The Boards hold a joint meeting at 
the beginning of each crop year and decide upon the 
grade requirements for the ensuing year. This was 
an important function before the United States 
Department of Agriculture promulgated standards 
for wheat, corn, and oats. Now the meeting is 
chiefly a formality to adopt the federal standards. 

How Appeals on Grading may be Made 

The Boards also pass upon the grades of the 
inspection department when requested by a repre- 
sentative or owner of grain, and, since its decision 



22 GRAIN LESSON 2 

regarding the grade is final so far as the state 
inspection is concerned, the Boards theoretically 
determine the standards of grading in Minnesota. 

Here, again, federal supervision has reduced 
the importance of this function, since an appeal may 
may be made from a grade of the state inspection 
department on wheat, corn, and oats direct to the 
federal supervisor. Or an appeal from the grade 
of the Board of Grain Appeals may be made to the 
federal supervisor where the grain involved is in 
interstate commerce. This means, then, that the 
standards of grading for a very important part of 
the principal grains are determined by the federal 
supervisors. 

Since the Board of Grain Appeals uses the same 
standard of grading for all shipments of a given 
grain, it is evident that for practical purposes, 
the standards for wheat, corn, and oats are ulti- 
mately determined by federal supervisors. How- 
ever, the Boards still render the desirable service 
of providing a check on the grading of the inspec- 
tors of grain which is in intrastate commerce, the 
original grade of which cannot be appealed to a 
federal supervisor. 

How the Minnesota State Inspection Operates 

An analysis of the working of an inspection de- 
partment will clarify the description of the or- 
ganization given above. Remember that this is a 
description of the working of Minnesota inspection. 
In details, it may vary from other inspection 
departments. In principle it is the same. The 
first work of an inspection department is to secure 
a sample of the grain. A corps of samplers is 
stationed in each terminal railroad yard to secure 
samples of grain as soon as it arrives. To facil- 
itate the work, the railroads reserve portions of 
their yards for grain receipts. Samplers are also 
stationed at the terminal elevators. To prevent 
delay and congestion in the terminal yards, samp- 
ling stations are maintained at towns outside of 



EXCHANGE AND STATE INSPECTION 23 

Minneapolis and Duluth where samples of grain are 
obtained and expressed to the inspection office at 
Minneapolis or Duluth. Grain is thus often graded 
and some times sold before the car reaches the 
market . 

This practice of sampling at outlying stations 
is peculiar to Minnesota. Other markets have 
studied it with a view to its introduction, but it 
has not been universally adopted by large markets 
because of the possibility of the sample to change 
in quality or condition during the time of trans- 
portation, and so become non-representative of the 
shipment . 

The Illinois Inspection Department has at- 
tempted to solve the problem at Chicago by estab- 
lishing sub-inspection offices at four of the 
principal grain terminals. It is difficult, how- 
ever, to maintain uniform grading in five different 
laboratories. 

The Minnesota Inspection Department, by using 
a specially prepared container to protect the 
sample from heat, light, and atmospheric condi- 
tions, has secured fairly satisfactory results. 
In fact, several years experience with the sampling 
at substations has proved so satisfactory that there 
is little probability of its being abandoned. 

How the Grain is Sampled 

During the busy season ,the samplers begin 
work at daybreak. They are accompanied by a chief 
sampler who supervises and assists with the samp- 
ling. One member of the corps prepares the car for 
sampling by breaking the seal. He records the seal 
number. He also examines the car for leaks and 
records its condition. 

When the car is ready for sampling, a sampler 
enters with a double-shell probe, about five feet 
long and two inches in diameter. This he thrusts 
into the grain. By turning the inner shell of the 
probe, holes are opened on the side, through which 



24 GRAIN LESSON 2 

the grain pours into a series of compartments. By 
another turn of the shell, the compartments are 
closed. 

The probe is then withdrawn and the grain 
poured onto a cloth for examination, after which it 
is put into an individual canvas bag to be sent to 
the inspection office. 

Why Fair Samples are Assured 

Correct sampling is an essential prerequisite 
to efficient inspection. Inspectors are, there- 
fore, instructed to make not less than five probes 
and to make as many more as is necessary to obtain 
a representative sample. Five probes appear to be 
a minimum number for carloads in order to guard 
against non-representative samples when cars are 
loaded unevenly, or to detect the loading of cars 
in such a way as to conceal the real quality of the 
grain. 

The sampler notes, on a certificate, the number 
of the car and such other information as may be 
useful in identifying the report. In case the car 
is fraudulently loaded in such a way as to deceive 
the buyer (this is known as a "set-up" or a "plugged" 
car) , an additional sample is taken of the inferior 
contents, and a notation made of the location and 
amount of inferior grain. 

When the state sampler has completed his work, 
private samplers in the employ of parties inter- 
ested in the grain, enter the car to secure a sample 
that is used as a check on the sampling of the state 
sampler, and that is displayed to prospective 
buyers on the floor of the trading room. In order 
that the private samplers may not interfere with the 
official sampling, they are prohibited from working 
with the state samplers. 

After the sampling has been finished, the car 
is resealed with a state seal, the number recorded, 
and the samples sent to the inspection office. 



EXCHANGE AND STATE INSPECTION 25 

Indoor Inspection a Recent Development 

Prior to 1904, all grain was graded at the car 
door. A small kettle and scales for testing weight 
per bushel, a probe, and some bags for the samples 
were the only inspection equipment necessary at 
that time, and this equipment could be easily 
carried from car to car. But the varying conditions 
of heat, light, and temperature under which inspec- 
tors worked, made it difficult for them to grade 
uniformly. So indoor laboratories where the work- 
ing conditions could be controlled, were tried. 
They proved so successful that other inspection 
departments soon adopted the plan, and now, every 
important grain market has an inspection labora- 
tory. 

At the inspection laboratories, the inspectors 
are provided with sieves, weighing devices, and 
other equipment for making the proper tests. If, 
after having made the tests, the inspector is in 
doubt, he consults the deputy chief inspector. In 
this way, uniform grading is maintained in the lab- 
oratory. The grade is indicated on the inspection 
certificate which is then initialed by the inspec- 
tor and recorded in the office before being surren- 
dered to the representative of the grain. 

What to do if Dissati sfied with the Inspection 

In case of dissatisfaction with the grade, the 
representative or owner may request a re-inspection 
before the identity of the grain is lost or before it 
leaves the market. The deputy chief inspector 
grades the grain on a re-inspection, using the 
original sample which is preserved for such a con- 
tingency. Or, a new sample may be secured if the 
representative so requests. The charge for re- 
inspection is $2 if the original grade is sustained, 
otherwise it is free. 

If there is still dissatisfaction with the 
grade, an appeal may be made to the Board of Grain 
Appeals or to the federal supervisor. These au- 



26 GRAIN LESSON 2 

thorities secure new samples to grade an appeal. 
The charge is $2 for an appeal if the grade appealed 
from is sustained, otherwise it is free. 

State Inspection More Representative 

What can be said in favor of state inspection as 
against private or exchange inspection? Its 
merits are three-fold. 

First: It has given representation to grain 
producers and country shippers whose lack of con- 
fidence in exchange inspection was a constant 
source of market friction and political discontent. 

The inclusion of these groups in its control, 
however, has sometimes had the unwholesome effect 
of making the inspection policy subservient to the 
producers' interest. In such instances, the situa- 
tion from the standpoint of efficient grain market- 
ing, is as unsatisfactory as the dominance by any 
other trade interest. Confidence in inspection is 
destroyed when it is liable to the exploitation of 
any one market group. In principle, the extension 
of the inspection organization to include all grain 
groups is right, since it insures more impartial 
inspection by the count erabalancing of market 
interests. 

Second: State inspection has been more aggres- 
sive in the development of grain standards and in 
the introduction of improved devices. The intro- 
duction of the inspection laboratory, the double- 
shell sampling trier, the wild oat separator, the 
experimental laboratory, and other improved devices 
must be credited to the state inspection depart- 
ments. 

Third: State inspection has furnished a large 
fund of information about the organization of a public 
inspection department that has been valuable to 
establish federal supervision and that will con- 
tribute to the perfecting of a national inspection 
system. 



EXCHANGE AND STATE INSPECTION 27 

THE DRAWBACKS TO UNIVERSAL STATE INSPECTION 

On the other hand, state inspection, by being 
organized on a territorial basis, has created a 
problem of conflicting jurisdiction at three of the 
principal grain markets which it has thus far been 
unable to solve. 

The problem first appeared at Kansas City. 
What is commonly referred to as the "Kansas City 
grain market" includes both Kansas City, Missouri, 
and Kansas City, Kansas. The warehouse and term- 
inal transportation facilities are about equally 
divided between the two cities, while all of the 
grain is sold on the Board of Trade in Kansas City, 
Missouri. 

While the Kansas City Board of Trade rendered 
the exclusive inspection service, the two cities 
were considered as a single market. When a Missouri 
state inspection department was established in 
1889, however, it had no authority to grade grain 
arriving in Kansas City, Kansas. This left the 
half of the market in Kansas to be served by Board 
of Trade inspection and the half in Missouri to be 
served by state inspection. 

Two years later the Kansas Warehouse Act estab- 
lished a Kansas state inspection department. This 
was only a half-way measure. It was not until 1897 
that a full-fledged inspection system was provided 
by law. Inspection not being compulsory, the num- 
ber of inspections was too small to make the system 
self supporting. In 1911, however, more aggressive 
administration of inspection wishing to make the 
service self sustaining, raised the inspection fees 
and made inspection of all grain arriving at Kansas 
City, Kansas, and of all grain at the terminal 
warehouse compulsory. 

Duplic a te Inspection in t h e Kansas City Market 

The warehouse companies objected to this new 
policy, since it would impose an additional cost 



28 GRAIN LESSON 2 

upon the grain, and it would result in two inspec- 
tion charges for that part of the grain arriving in 
Kansas City, Kansas, and subsequently transferred 
to Kansas City, Missouri. The Missouri inspection 
rules also made the inspection of grain arriving at 
Kansas City, Missouri, compulsory. The contro- 
versy was taken to the courts where the warehouse- 
men contested the right of the Kansas officials to 
make inspection. 

The decision of the Supreme Court was a victory 
for the grain trade. The Court interpreted the law 
as providing for compulsory inspection of only that 
portion of the grain going into or coming out of 
public warehouses, and it defined a public warehouse 
as one that mixes the grain, or reserves the right 
to mix the grain of different owners. 

The warehousemen had already asked to have 
their license as public warehousemen revoked so 
they were no longer subject to Kansas inspection. 
As regards the grain that does not go into storage, 
the inspection department can grade only such 
grain as is not marked so as to indicate that no 
inspection is desired. Shippers to Kansas City, 
Kansas, not wishing their grain graded, may there- 
fore, be relieved of inspection charges by indicat- 
ing on the bill of lading or on the grain car that 
no inspection is desired. 

State Inspection Still Confusing at Kansas City 

There is still dual inspection in the market, 
the result being that there are double inspection 
charges on some grain moving from Kansas into 
Missouri. Any value that the voluntary feature of 
the system may have had is partially lost by the 
prohibition of any inspection other than Kansas 
state inspection in Kansas. The Kansas City Board 
of Trade has endeavored to get each inspection de- 
partment to accept the inspection certificates 
of the other, but to no avail. Federal supervision 
has also been unable to effect a compromise. 



EXCHANGE AND STATE INSPECTION 29 

State Inspection at Duluth and Superior is 
Confusing 

A similar condition exists at the head of the 
Great Lakes. Duluth and Superior, because of their 
location, are commercially one, yet they are divided 
by a boundary line which places them under the 
jurisdiction of different states. 

Nearly all of the grain shipped to Superior, 
Wisconsin, is sold on the Duluth Board of Trade in 
Minnesota. There is a board of trade at Superior 
which the city has encouraged in the hope of at- 
tracting grain trade to Superior, but it is an im- 
potent organization which sells most of the little 
grain that it receives on the Duluth Board of Trade, 
The favorable location of Superior, however, has 
resulted in about half of the storage facilities at 
the head of the Great Lakes being located there. 

In the absence of any board of tra % de or Wiscon- 
sin inspection at Superior, the Duluth Board of 
Trade graded all grain arriving at Superior prior to 
the adoption of Minnesota State inspection in 1385. 
When the Minnesota inspection superseded the board 
of trade inspection at Duluth, the Superior eleva- 
tors asked the state of Minnesota to extend its 
inspection service to Superior. 

Technically, the Minnesota department had no 
jurisdiction at Superior which is located in Wis- 
consin, but, in order to accommodate the elevators 
which were also transacting business in Minnesota, 
it consented to extend the service to Superior, 
with the understanding that the elevators and mer- 
chants thus accommodated would conduct their busi- 
ness in strict accordance with the Minnesota laws, 
rules, and regulations, and also follow the rules 
of the Duluth Board of Trade. 

Inspection Troubles at Superior 

The business interests of Superior, which were 
jealous of Duluth' s monopoly of the grain trade at 
the head of the Great Lakes, were dissatisfied with 



30 GRAIN LESSON 3 

the arrangement and sought to discontinue Minne- 
sota inspection at Superior. By thus securing in- 
dependent regulation of the grain market at 
Superior , these interests hoped to attract the 
grain trade to that city. 

This object at once became apparent when Mil- 
waukee, a grain market of considerable importance, 
was exempted from the provisions of the law. 
Granting that the terminal elevators at Superior 
needed regulation, this could have been secured by 
a warehouse law permitting the use of Minnesota 
inspection certificates at Wisconsin elevators and 
thus have obviated the division of the market into 
two inspection districts. 

An inspection department was organized at 
Superior by the provisions of this law the follow- 
ing summer, but after six weeks, it was discontinued 
and Minnesota was again requested to extend its 
inspection service to the grain trade at Superior. 

The request was granted, and there was no 
further trouble until a Wisconsin citizen in- 
advisedly had the Minnesota inspectors who were 
working at Superior arrested and brought before a 
Superior court for trespass. 

No action could be secured against the inspec- 
tors as they were working under an agreement with 
the Superior grain interests, so the case was 
thrown out of court. This incident occurred in 
1902. 

Two years later, the Wisconsin Legislature en- 
acted another warehouse and inspection law provid- 
ing for grain inspection at Superior and the follow- 
ing year the market at the head of the Great Lakes 
was burdened with two inspestion systems. 

How Wisconsin L aw Hampers the Superior Market 

The Minnesota grain interests opposed Wisconsin 
inspection on the ground that it was unnecessary. 
Practically all grain arriving at Superior is sold on 
the Duluth Board of Trade on Minnesota inspection. 



EXCHANGE AND STATE INSPECTION 31 

This necessarily restricts Wisconsin inspection to a 
negligible part of the grain arriving at the head of 
the Great Lakes and confines its work almost entirely 
to grading the grain into and out of the elevators at 
Superior. 

The law makes the inspection of all grain going 
into or out of Wisconsin elevators compulsory. If 
Wisconsin inspection had been made optional, it would 
have imposed no costs upon the grain trade other than 
those for which the grain merchants considered them- 
selves repaid. 

But the regulation for compulsory inspection of 
all grain into and out of Superior elevators, created 
a double inspection of the grain that had first been 
graded by the Minnesota inspectors for sale on the 
Duluth Board of Trade and then by the Wisconsin in- 
spectors for storage in Superior elevators. Wiscon- 
sin, instead of aiding its own elevators, had thus 
given them a handicap in competition with Duluth 
elevators in the form of additional inspection costs. 

Inspection Cost Paid by Shippers and Elevator 
Operators 

Ordinarily, the inspection costs are a lien 
upon the grain, and the shipper bears the expense, 
but where there are two inspections, as at the head 
of the Great Lakes, the shipper ordinarily bears the 
first and the elevator operator bears the second, 
since the second inspection is not called until the 
grain has been sold and is ready for storage. It 
was, therefore, the Superior elevators that felt 
the burden of Wisconsin inspection. 

The inspection fee, per car, it is true, is 
small and the additional cost of an individual car 
appears insignificant, but when you consider that 
Superior had an elevator capacity of over 18 million 
bushels, and that one company received and shipped 
20 million bushels of the 1914 crop, you can appre- 
ciate the importance of a small additional expense 
on the volume of grain that passed through this 



32 GRAIN LESSON 2 

market. Besides, a dual inspection system causes 
disputes and delays which may prove costly. 

The Wisconsin elevator interests, accordingly, 
refused to abide by the provisions of the law and 
attacked its constitutionality on the ground that 
it was unnecessary and a restraint of interstate 
commerce. They secured an injunction from the 
federal court restraining the Wisconsin inspection 
department from grading grain until the matter was 
settled in the courts. 

Unfortunately, no decision was rendered to 
determine the relation of the two state departments 
to this market, for a compromise was effected be- 
tween the Wisconsin department and the elevators, 
and the Wisconsin inspection was resumed January 1, 
1908, with certain restrictions. 

Much of Duluth Grain Inspected Twice 

Rather than prolong the costly litigation, both 
the trade interests and the Wisconsin inspection 
department made concessions. Briefly, the inspec- 
tion department agreed to accept Minnesota inspec- 
tion certificates for wheat and flax going in or 
out of Superior elevators. The elevator companies 
conceded the right of the Wisconsin inspection de- 
partment to grade grain at Superior and, in return 
for the concession of the Wisconsin department, 
they promised to accept Wisconsin inspection on 
coarse grains at Superior and to reimburse the 
state for its loss from litigation. This agree- 
ment is still in force. 

There is, therefore, no duplication of inspec- 
tion on flax and wheat, but, since most of the grain 
is sold on the Duluth Board of Trade on Minnesota 
inspection, coarse grains that go into the Superior 
elevators generally have a double inspection. 

Shippers have the privilege of calling for 
Wisconsin or Minnesota inspection, or both. The 
choice is usually left to the grain receiver who 






EXCHANGE AND STATE INSPECTION 33 

invariably calls for Minnesota inspection, which 
the members of the grain trade consider more uni- 
form and which is the adopted basis for buying and 
selling at Duluth. 

An occasional shipper, hoping to secure a better 
grade thereby, requests Wisconsin inspection. The 
similarity of the standards of the inspection de- 
partments is such that there is seldom anything 
gained by the double inspection. This situation 
discourages an extensive use of the Wisconsin in- 
spection by shippers and obviates the delay and 
congestion of traffic that might otherwise develop 
when the movement of grain is heavy. 

Double Inspection Increases Marketing Costs 

There appears to be little justification for 
the existence of Wisconsin inspection at Superior. 
It is indeed a check upon the Minnesota inspection 
at Duluth, but this scarcely warrants the Superior 
inspection in view of the disadvantages which it 
involves. It destroys the unity of the market, 
creates delay in the crop movement, friction among 
the trade interests, and general dissatisfaction. 
It is the source of duplication of service which in- 
creases the cost of marketing and creates an inter- 
ference with legitimate and prosperous trade. 

ATTEMPTS TO CORRECT THE FAULTS OF STATE 
INSPECTION 

A somewhat similar situation is also found in the 
relation of North Dakota and Minnesota. Duluth and 
Minneapolis are the natural outlets for North 
Dakota grain, but as they are both located some 
distance from the Minnesota-Dakota boundary line, 
there is little possibility of North Dakota estab- 
lishing a state inspection system to compete with 
Minnesota and to attract grain to Dakota markets. 

The governor of North Dakota has been author- 
ized by a Minnesota law to nominate one member of the 



54 GRAIN LESSON 2 

Wisconsin Grain Commission. This commission 
serves as the Board of Grain Appeal at Superior. 
North Dakota does to this extent compete indirectly 
with Minnesota inspection. 

Dakota Producers Criticize Minnesota Inspection 

This is rather ineffective competition. The 
North Dakota grain producers and shippers are still 
obliged to sell their grain in Minnesota markets in 
whose inspection they have no voice. 

There appears to be a rather general mistaken 
impression among the North Dakota grain producers 
that the inspection is controlled by the grain in- 
terests of Minneapolis and Duluth, notwithstanding 
the fact that the Minnesota grain producers have a 
voice in Minnesota inspection and have much in- 
fluence in the determination of the inspection 
policy. 

The Board of Grain Appeals and the Minnesota 
inspection department follow a policy of favoring 
the grain when there is any question regarding the 
grades, which is an advantage to the country shipper 
rather than to the buyer. 

No Evidence of Discrimination in Inspection 
Service 

There is also a widespread belief that North 
Dakota grain is discriminated against in Minnesota 
markets notwithstanding the fact that the inspec- 
tion department has employed every precaution to 
keep its inspectors from learning ownership, 
point of origin, or destination of the grain that 
they grade. Both public and private interests have 
investigated the inspection service, and have found 
no evidence of discrimination. If such a condition 
exists, it is obviously unintentional. 

It may be that the small number of Minnesota 
grades does not permit of a suff icently fine classi- 
fication of the wheat to distinguish it from other 
wheat produced under less favorable conditions of 



EXCHANGE AND STATE INSPECTION 35 

soil and climate. On the other hand, the criticism 
of grain grades has not been quieted by the intro- 
duction of federal wheat standards which have 18 
grades instead of the six which Minnesota used, and 
which have a Dark Northern sub-class of six grades 
to provide for the hard glutenous wheat produced in 
regions similar to North Dakota. 

Dakota Legislature Attempts to h ave Inspection 
Simplified 

This situation has been a constaant source of 
friction and misunderstanding between the North 
Dakota producers and the grain organizations at the 
terminal markets. In some instances, it appears to 
have been aggravated by bad leadership on both 
sides. 

Since North Dakota has no jurisdiction over 
grain in Minnesota markets, investigations, reso- 
lutions, and state inspection have been resorted 
to. The first move appears to have been made by a 
committee of North Dakota bankers which made a 
hasty investigation of grain marketing at Minne- 
apolis and Duluth in 1906 and reported glaring 
abuses. 

The report was not specific as to the findings, 
but it received such wide publicity that when the 
legislature met the following year, the state was 
in a mood for action on the question. The only 
result was the sending of a concurrent resolution 
to the Minnesota Legislature requesting that it 
withdraw its opposition to Wisconsin inspection, 
revise its methods of grading and docking, and 
prohibit mixing at its terminal elevators. 

To this the Minnesota Legislature replied that 
it did not officially oppose Wisconsin inspection, 
and that Minnesota grades did not discriminate 
against North Dakota grain. 

Investigators Find no Fault with Minnesota Grades 

An investigational committee to study terminal 
grain marketing was thereupon appointed by the 



56 GRAIN LESSON 2 

North Dakota Legislature. The committee's report 
to the governor recommended that the state of North 
Dakota lease and operate terminal elevators at 
Minneapolis and Duluth to determine the advisa- 
bility of state owned terminal elevators at those 
markets. No criticism of inspection was offered, 
although dissatisfaction with inspection was the 
chief cause for the investigation. However, 
federal inspection was recommended as a solution of 
the situation. No tangible results came from the 
investigation. 

An effort was then made to secure representa- 
tion upon the Minnesota Boards of Grain Appeals 
similar to the representation given to North 
Minnesota Attorney-General prevented such coop- 
eration. 

However, North Dakota was given the privilege, 
which it accepted, of having a representative sit 
with the Board of Grain Appeals in an unofficial 
capacity to watch the inspection. 

Two commissioners were appointed to study 
grain marketing, one at Minneapolis, and one at 
Duluth. They served from August 26, 1909, to 
December 31, 1910. Their report to the governor of 
North Dakota commended Minnesota inspection highly, 
which leads one to believe that the erroneous criti- 
cism of terminal inspection may have been due to a 
confusion of terminal and local marketing abuses, 
that the difficulty may have been with the grading 
at the local rather than at the terminal market. 

Interest Shifts to Terminal Elev a tors 

Interest now shifted to terminal elevators. 
Some country elevators of North Dakota considered 
the leasing and operating of a terminal elevator, 
but with their limited financial support they could 
not interest any grain dealers in assisting them. 

Attention then shifted to state owned and 
operated elevators outside the state. A popular 
referendum in 1912 approved the action of the 



EXCHANGE AND STATE INSPECTION 37 



legislature in 1909 in proposing state elevators at 
the principal markets to which North Dakota grain 
was shipped. 

Attention then shifted to state-owned and 
state-operated elevators within the state, and 
again a popular referendum in 1914 gave its approval 
to such a program. The action of the legislature 
at its next session, however, made the program in- 
operative when it repealed the law providing the 
funds for building the elevators. 

Non-Partisans Enact an Inspection Law 

The opposition to the marketing system now 
assumed a new character. The thwarting of the 
desires of the people, as expressed in the referen- 
dum, resulted in the organization of the Non- 
partisan League, which was victor in the election of 
1918. 

The new leaders interpreted their complete 
victory at the polls as a vindication of their elec- 
tion promises and undertook at the well-known 
session of the legislature in 1919 to secure the 
promised reforms. Among the laws that were passed 
to secure greater state control of the production, 
marketing, and credit facilities of the state, the 
grain inspection law and the Warehouse Receipts Act 
of 1917 were re-enacted to strengthen the system of 
state-owned terminal elevators and flour mills that 
were contemplated in the laws of that session. 

Inspection at Country Markets 

Without terminal markets and with no possi- 
bility of state-owned elevators and mills for 
several years, an inspection system of the prevail- 
ing type, which is conducted primarily for the 
shippers of grain, and for buyers and sellers at 
the large terminal markets, was of little use. The 
authority granted by the law was, therefore, used 
to create an inspection system that takes official 
inspection back to the small country markets. 



38 GRAIN LESSON 2 

How North Dakota Inspection is Organized 

The administration of the system is left to the 
State Inspector of Grades who is appointed by the 
governor, and who must be a faculty member of the 
state agricultural college. 

The duties of this officer correspond to those 
of the chief inspectors of other systems, except 
that he is endowed with greater authority. In addi- 
tion to fixing standards, establishing rules for 
inspection, appointing all of the assistant and 
country inspectors, hearing appeals, and supervis- 
ing weights and measures, he is responsible for other 
grain marketing activities, including the super- 
vision of the margins that are taken by grain 
buyers. 

The administration is indeed highly central- 
ized and autocratic powers are conferred upon its 
chief officer. Farmers who buy and sell grain 
among themselves are exempt from the compulsory 
features of the law, although all persons and cor- 
porations that operate mills and elevators, that 
buy, store, or ship grain for a profit, must have it 
graded by a licensed inspector who is required to 
provide the grading equipment prescribed by the 
State Inspector of Grades and to issue a grade cer- 
tificate to the seller. 

In case of dispute, regarding the grade of 
grain, samples may be sent to the State Inspector 
of Grades whose decision is final. 

Payment for Dockage is Compulsory 

A further innovation in the American inspection 
system that is undertaken by this inspection de- 
partment is the compulsory payment for valuable 
dockage at country points. (Dockage is foreign 
matter and other cereals that can be easily removed 
by equipment common in elevators and mills.) 

The value of the dockage at the terminal market 
is reflected in the market price, but there is some 
question whether the imperfect competitive con- 



EXCHANGE AND STATE INSPECTION 39 

ditions at the country points enable the producer 
to secure its full value when he markets his grain at 
the country point. In the case of cooperative mar- 
keting associations, the full value returns to the 
producers, as a class, but the prevailing method of 
determining the country price still prevents each 
lot of grain from receiving the true value of the 
dockage that it contains. 

To correct this weakness, the determination of 
the amount and the value of the foreign material in 
grain is required in North Dakota, and the seller, 
usually the farmer, is given the option of selling 
the dockage at its commercial value or of having it 
separated from the grain at a nominal cost and re- 
turned to him. 

Compulsory Payment for Dockage Arouses Much 
Opposition 

Probably the enforcing of this section of the 
inspection law has been responsible for the creation 
of more opposition from the grain dealers than any 
other part. In many cases, grain buyers do not have 
the facilities for cleaning. In other cases, buyers 
feel, and probably often justly, that they pay the 
farmers all their grain is worth, including the 
value of the dockage. In many cases, the opposition 
is largely resentment to interference with private 
business in matters pertaining to the regulation 
of market values. 

Compulsory payment for dockage is, neverthe- 
less, not an inspection problem. It is rather a 
species of price fixing. 

The function of an inspection department is to 
classify grain on the basis of quality and condi- 
tion and to leave the creation of market value to 
supply and demand forces. 

In judging the merits of an inspection system 
adapted to local marketing, the experience of com- 
pulsory payment for dockage ought, therefore, to be 
left out of consideration. 



40 GRAIN LESSON 2 

Law Aims to Maint a in Healthy Competition 

We may grant that the producers and the leaders 
of the Northwest under-estimated the value of the 
existing market system and the advantages of the 
terminal inspection. Still it is true that, due 
to imperfect competitive and even monopolistic con- 
ditions that have sometimes existed at country 
points, and to his inability to judge the quality of 
his grain according to terminal standards, the 
producer has not always realized the full advant- 
ages of terminal inspection. 

In recognition of this fact, the North Dakota 
inspection law aims to create more healthy competi- 
tive conditions by providing an official opinion of 
the quality and condition of every load of grain 
when it reaches the country market, in order that 
the producer may have a better means of comparing 
the local price with the quotations of the terminal 
market to which his grain may ultimately go. 

If every lot of grain, therefore, is sold on its 
merit, the present tendency to pay a flat price for 
all grain, irrespective of its quality, would dis- 
appear and good methods of farming would receive 
their proper reward. 

We akness of North Dakota Inspection Law 

The weakness of the system consists in the 
underestimation of the efficiency of existing mar- 
keting methods. This increases the responsibility 
of the new inspection system by magnifying the 
possible gains to be derived from it. Its further 
weakness lies in the breadth and scope of the serv-.. 
ice, which is extended to markets that are widely 
scattered and far from the source of control - mar- 
kets so small that specialization is scarcely 
possible. 

The elevator managers, who constitute the prin- 
cipal class of country dealers, are employed for 
their ability to superintend the many operations 



EXCHANGE AND STATE INSPECTION 41 

of a country warehouse, and not necessarily be- 
cause they are expert inspectors of grain. 

Salaries for these positions are small and they 
command men of limited marketing experience. These 
conditions make it difficult, even with traveling 
supervisors to aid the local buyers, to maintain 
uniformity of grades throughout the state and to 
prevent the misuse of the grade standards. 

Law Declared Unconstitutional as Restraint of 
Trade 



The inspection system is now inoperative, the 
United States Supreme Court having recently de- 
clared the law creating the inspection department 
unconstitutional on the ground that it interfered 
with interstate commerce. Whether or not the law 
will be re-enacted in such a way as to meet the con- 
stitutional test is impossible to say. At this 
writing (1922) a petition is being circulated in 
North Dakota for a referendum on the subject to be 
submitted to the voters at the next election. 

The experience with this new type of inspection 
in North Dakota is too short to give any indication 
of its ultimate probable success. In any case, it 
was a part of such a comprehensive program that it 
is impossible to separate it from the larger move- 
ment. Its success or failure, without the con- 
stitutional objection, will be determined largely 
by the progress of the reform movement. In so far 
as it is possible to separate it from the larger 
movement, its success is complicated by the necess- 
ity of using the same grain standards at the term- 
inal and country markets, whereas their methods of 
buying and handling grain are quite different. 
Moreover, unless the difficulties of wide super- 
vision can be handled, we can hardly expect much 
progress in comprehensive inspection for country 
grain markets. 



42 GRAIN LESSON 2 

MUST YOU SELL GRAIN ON FEDERAL STANDARDS? 

Many believe that federal inspection (to which 
subject the next lesson is entirely devoted) will 
some day almost entirely replace all other types of 
inspection. Consequently, it is exceedingly im- 
portant that you know everything about federal in- 
spection. 

Is there any appeal from the judgment rendered 
by a federal inspector? 

Must you sell your grain according to grade 
fixed by federal inspection? 

Is every one who buys or every one who sells, 
legally bound to abide by the standards set up by 
the federal government? 

These questions indicate to you the possibili- 
ties of misunderstanding federal inspection. They 
also indicate the extreme practical nature of 
lesson 3, for these questions and many more are 
clearly answered there. 



EXCHANGE AND STATE INSPECTION 43 



GLOSSARY OF MARKETING TERMS USED IN THIS LESSON 

arbitration, n. The act of giving judgment, usually 
by disinterested parties, and usually by a commit- 
tee containing a number of individuals. As used in 
this lesson, refers to the judging of the quality of 
grain by an arbitration committee made up of cap- 
able men officially appointed. This arbitration is 
asked for, as a rule, when the official inspection 
is not satisfactory to the owner of the grain. 

bill of lading, n. A document issued by a trans- 
portation company acknowledging acceptance of 
goods for transportation. It is usually signed by 
the owner of the goods or his agent. It is evidence 
that the goods have been delivered to the transpor- 
tation company and that the transportation company 
has acknowledged its responsibility to preserve and 
deliver the goods at the specified destination. 

A "straight" bill of lading simply authorises 
the carrier to deliver the goods to a specified re- 
ceiver (consignee) at the destination indicated. 
An "order notify" or "shipper's order" bill of 
lading requires that an order be issued by the 
shipper before the delivery of the shipment can be 
made . 

When a draft accompanies the bill of lading, the 
bill of lading and the draft are usually sent to a 
banker for the collection of the draft, in which 
case, the transportation company will not deliver 
the goods until the bill of lading is given up by the 
men asking for the goods. The bank, of course, is 
not authorized to deliver the bill of lading until 
the draft has been paid. 

certificate of grade , A document used by an offi- 
cial inspector certifying to the grade of a certain 
quantity of goods. 

contract trading. The buying and selling of con- 
tracts in which it is agreed that certain commodi- 
ties will be delivered at a specified time. 

doc kage, n. As used in this lesson, dockage in- 
cludes foreign matter in cereal grains that can 
be easily removed by equipment common in elevators 
and mills, and which foreign material has value 
after it is removed. This dockage usually includes 
other cereal grains, and weed seeds, both of which 



44 GRAIN LESSON 2 

may have a value as feed for live stock. In some 
cases, this material must be returned to the owner 
of the grain, or must be paid for ; but in most 
states, the dockage belongs to the man who buys the 
grain and he makes use of it as he sees fit. 

exchange inspection, Inspection authorized by an 
exchange and performed by a person in the employ 
of the exchange. 

federal supervision. Supervision exercised by the 
authority of the national government. 

future trading. The buying and selling of con- 
tracts requiring the delivery of commodities at 
some future time. 

futures market, 1. A market where future trad- 
ing is carried on. 2. Often used to refer to the 
prices as a whole that are being paid for future 
contracts. 

grain exchange, A corporation whose members buy 
and sell grain. The corporation, as a rule, pro- 
vides a place where the trading is done ; it also 
prescribes rules for governing the members in their 
dealings. Exchanges are also in existence for the 
handling of certain products other than grain. 

hedge, n or v. The process of reducing risk due to 
possible price changes by selling a future when a 
commodity is purchased or by buying a future when 
sale of a commodity is contracted. The hedge is 
usually made by buying or selling a future of the 
option month immediately following the time when 
the buyer expects to sell the commodity (grain) 
bought or when the seller of a commodity (flour) ex- 
pects to buy wheat to fill contracts to sell flour. 

p lugged car, A car loaded with products of the same 
kind, but of radically different grade. Such load- 
ing is often done with the idea of deceiving the 
buyer, but is sometimes done through ignorance; 
often called a "set up" by the trader. 

samp le trading. The buying and selling of goods in 
which a sample of the article sold is submitted to 
the prospective buyer for inspection. 

"set up" car, A car fraudulently loaded to deceive 
the buyer ; usually radically different grades of 
the same product are loaded into the same car, the 
poorest grade being underneath and the best grade 
being on the top; a "plugged car." 

12-Z2-2M-9 



